Private equity eyes real estate opportunities to hedge against inflation
Most private equity real-estate investors in key capital markets have flocked to different real estate assets to hedge against rising interest rates, allocating more capital towards income-generating assets. This observation was made on Feb 16 by a panel of international private equity real estate investors and capital markets consultants at a forum organised by Q Investment Partners (QIP), a Singapore-based private equity real estate firm.
The panel comprised Peter Young, CEO and co-founder of QIP; Alexander Bellingham, director and head of sales at QIP; Chedli Boujellabia, CEO of Alyssa Partners; Paddy Allen, head of operational capital markets at Colliers (UK); and Regina Lim, head of capital markets research at JLL Singapore.
Focus on rents and capital value growth
In Southeast Asia, most real estate-centric equity investors are allocating capital towards real estate sectors that “positively correlate with an increase in material rental income, in an effort to offset high levels of inflation”, says QIP’s Young.
These include institutional-grade residential housing such as multi-family housing and purpose-built student accommodation (PBSA), which will likely drive the increased allocation from institutional investors throughout 2022, he adds.
“In Singapore, we have seen that rising inflation is directly correlated with material rental growth and capital value appreciation,” says Young.
Most investors in Southeast Asia still evaluate their real estate investment strategies through the Covid lens, recognising the “tailing and oscillating impact of the pandemic”, he says.
As a result, these investors will be looking for real-estate opportunities and adjusting their portfolios to hedge against market risks, including inflation. “Markets like Japan that have a stable inflationary environment and reliable macroeconomics are typically a safe store against these possible headwind risks,” says Young.
This year, QIP will focus on three markets it already has a foothold in. These are Japan and the US, where the firm has a focus on multi-family housing; as well as the UK, where it plans to solidify its standing as a provider of PBSA. In addition, QIP will focus on the continued development of projects within the broader residential sector.
Strong investment demand for multifamily assets
Japanese-based investors are looking at domestic opportunities and assessing suburban locations, says Alyssa’s Boujellabia. Amid tight international border restrictions, the residential market saw some slowdown in the rental segment last year. However, domestic consumption in Japan was strong and consistent throughout the year.
Boujellabia says that multi-family assets have become much more sought-after as stable income-producing assets in Japan, and the market for condominium assets is also expected to be relatively stable. “Inflation concerns in Japan are focused on energy and domestic consumption markets, and could shield rents and prices of existing housing stock,” he says.
Meanwhile, UK-based private equity real estate investors are eyeing PBSA, elder care housing and central London properties, says Colliers’ Allen.
However, he believes that the residential housing sector in the UK needs to continue evolving to meet the needs of consumers. “Consumers in the UK are fussier and more selective in terms of the housing they seek. They are focused on getting quality accommodation and are willing to pay for these high-quality assets,” says Allen.
More demand from institutional investors
According to JLL’s Lim, there is a focus on Asia Pacific real estate assets, and investors prefer less volatile sectors such as logistics and some prime retail assets.
Despite recent reallocations, some institutional investors are still below their target real estate investment allocations, with some at only a third of their expected real estate investment levels, says Lim. “Although allocations to real estate are growing, the rate of allocations is not fast enough. The bottleneck is caused by the limited supply of high-quality incomeproducing products,” she says.
She also shares that the co-living sector in Asia is drawing more attention from investors, even institutional investors who view the sector as stable, rental-growing assets for their portfolios.
The co-living market in Asia Pacific is less fragmented and a growing number of younger home buyers are moving away from the traditional homeowner mindset, says Lim. This has spurred more demand for rental and multifamily residential housing in the region, she says.
A digital future for real estate investing
The panel also discussed the digital future for real estate investing. In Singapore, regulation is gradually catching up with digital investment platform and the tokenisation of real estate.
“The tokenisation of real estate continues to be an interesting and rapidly changing space, and is a focus area for QIP,” says Young. “By providing greater access to a wider range of property assets, the tokenisation of the real estate sector is set to drastically expand the depth of the capital markets, as well as positively deliver further liquidity.”
As the processes become more streamlined, there will be fewer barriers to entry for investors and the option to invest in real estate will become more popular, says Young.
Looking ahead, Young says that QIP will double down and scale up its investments in the PBSA sector in the UK, as well as in multi-family housing in the US.
On Feb 22, QIP announced a GBP40 million ($73 million) exit deal for two PBSA projects in Edinburgh, Scotland. The move is expected to deliver annual returns of over 18% from both developments, which is above the initial targeted annual returns of 16%.
“The assets are to be exited into QIP’s core plus equity fund which has an initial assets under management target of GBP150 million by end-2022. It has already garnered traction with large private and institutional investors,” says QIP.
QIP is also working to launch a multifamily real estate fund in Japan with the intent to acquire mulit-family housing assets and grow on its core real estate strategy in the market, says Young.